Faceless direct tax administration, a ground-breaking initiative
Piecemeal attempts to reduce compliance cost of income tax did not achieve the desired outcomes. The consequence was a burgeoning tax litigation and contentious levy of income tax of more than Rs 9 lakh crore by 2019. These disputes acted as a drag on business activity and were often blamed for dampening the spirit of entrepreneurship. In contrast to incremental changes of the past, a foundational shift has been attempted from August 2020. All income tax assessments, except for select few like those arising from search and seizure actions or of large business conglomerates, have become faceless. Under the faceless system of taxation, tax payers need not visit the tax office. The tax administrator is placed behind an anonymous digital wall and the taxpayer faces programmed queries. The annual income tax return goes through a risk analysis matrix that is dynamically designed every year by tax officials based on their experience of emerging trends in tax avoidance and evasion. The selection process of red-flagging tax returns for investigation and scrutiny is operated by a digital algorithm.
The faceless tax administration has generated a combative debate. The extreme criticism or the overt praise is generic in nature and content. It lacks understanding of years of thought process and cumulative changes that are at the root of the faceless scheme as well as the initial positive outcomes. In the three years of the faceless scheme, appeals against tax assessments in dispute have shown a sharp downward trend. It implies lesser disagreements with tax assessments and more ease in compliance of tax laws. Also, elasticity of income tax collections to increase in incomes has been more positive. The current financial year has seen direct tax collection growth of nearly 20% and the collections have exceeded the annual budgetary target fixed by the finance ministry.
Traditionally, the tax administration has functioned in territorial jurisdictions. The dynamic sphere of control, where a tax return filed in Mumbai is investigated and evaluated by a team of tax officials, and not an individual officer, who are stationed, for instance at Kolkata, is an innovative concept. It is not known which team of tax officials will analyse the tax return. It is algorithmically allocated to a team of tax officials in another city to verify correctness and completeness of income shown in the annual filing of any tax entity. The faceless scheme has transformed the decades-old manner of interface of taxpayers with the income tax department. An interaction that was personal and physical, and typically mediated by tax practitioners, has stopped.
Exploring new frontiers
Academically, the faceless scheme is exploring new frontiers. Traditionally, tax laws in India were implemented through relational trust. It was believed that local officials operating within well-defined geographical limits would gather area-specific information of tax gaps in the incomes shown by taxpayers. The tax administration had refined, and perpetuated initial institutional mechanisms adopted by the British, when they introduced income tax in India in 1859 in the erstwhile Awadh kingdom. In her study of colonial Lucknow, Veena Talwar Oldenberg has narrated a number of interesting illustrations of struggles to calculate income and tax, and how the British officials roped in neighbourhood committees, the mohalla panchayats, to assist in estimation of income. Yet, the pawn brokers community of “rastogis” of Asharfabad remained one step ahead of tax officials in avoiding and evading tax payments. They fabricated their account books, and they did not enter in their financial records a large proportion of their transactions with the nobility of the former Awadh empire. They habitually used their personal networks to influence the mohalla panchayats to reduce their tax liability.
Transactional trust
The faceless assessment scheme is a clear articulation of a move to transactional trust in place of relational trust. The neighbourhood networks of information as well as connections of the business and professional elite in their area of influence counts for nothing. The reams of account papers that the taxpayer used to prepare and file in the tax office is not needed. This role is taken over by data of financial transactions that the tax department now routinely and periodically collects from financial and regulatory institutions and authorities. The taxpayer ought to consider all such fund flows, before estimating or calculating his taxable income.
Voluntary compliance of tax laws is at core of the faceless scheme.
Empirical studies from developed countries suggest a causative relationship between potential capacity and capability of the tax administration to reach the trail of financial transactions of a uniquely identifiable tax entity that has left digital imprint on one hand, and voluntary compliance by the taxpayer on the other hand.
A better tax compliance is induced and coaxed by a visible knowledge with the taxpayer that his financial transactions have left behind footprints that are visible to the tax official. Further, no discretion vests either with the taxpayer or the tax official to ignore or camouflage fund flows that are reflected in these recorded financial transactions that exist in digital data for a longtime, and sometime even in perpetuity.
Redressal in real time
The faceless scheme is a ground-breaking initiative. Yet, it needs a sustained collaborative effort of stakeholders to course correct. At present, the dispute resolution in appeals is a cause of concern. Errors of omission, as against acts of commission to avoid tax payment, ought to be identified and segregated so that genuine mistakes may be corrected without long and tedious litigation.
The administrators need to analyse grievances of citizens regarding the appeal process, and they must implement changes in the faceless scheme that protect an honest taxpayer from potential harassment. Effective digital systems always have client-friendly, timely, and transparent grievance redressal mechanisms as technology is only a means; it is never an end in itself. Systematic redressal of grievances of citizens in real time will add further value to this holistic innovation in direct tax administration.
IN THE THREE YEARS OF THE FACELESS SCHEME, APPEALS AGAINST TAX ASSESSMENTS IN DISPUTE HAVE SHOWN A SHARP DOWNWARD TREND. IT IMPLIES LESSER DISAGREEMENTS WITH TAX ASSESSMENTS AND MORE EASE IN COMPLIANCE OF TAX LAWS